Goldman Sachs has spotlighted an often-overlooked sector poised to benefit from lower borrowing costs: biotechnology stocks. In a recent note to clients, John Flood, Goldman’s Head of Americas Equities Sales Trading, highlighted biotech as an under-the-radar opportunity for those seeking to capitalize on the Fed’s rate cuts. Flood noted that biotechnology stocks are uniquely sensitive to changes in interest rates as they often rely on projected future profits and are heavily impacted by the cost of capital. With little or no current profitability but significant upside potential, if clinical trials succeed, these stocks have an “option-like structure” that makes them particularly responsive to interest rate movements.

The note also emphasized that biotech has recently seen improved fundamentals driven by positive clinical outcomes and a more favorable regulatory environment. Despite these tailwinds, biotech remains under-owned by hedge funds. According to Goldman’s data, the sector ranks in the 13th percentile in hedge fund long/short positioning over the past year and just the 4th percentile over the past five years.

Recent performance data supports Goldman’s outlook. The iShares Biotech ETF climbed 7.7% in Q3, outperforming the Nasdaq Biotech Index and more than doubling the S&P 500’s 3.2% gain over the same period. For investors anticipating a continued decline in bond yields, Goldman suggests biotechnology stocks may offer more attractive exposure compared to other rate-sensitive equity sectors, which are more dependent on broader economic growth trends.

Read Also: 12 Best Technology Penny Stocks To Buy According to Hedge Funds and 12 Best Energy Stocks To Invest In Now.

Biotech Innovations: Small Caps Lead the Way

In an interview with Yahoo Finance on October 30, Stacey Sears, Portfolio Manager at Emerald Advisers, provided a comprehensive overview of the current landscape and investment opportunities in small and emerging biotechnology companies.

Sears acknowledged that there has been a significant innovation in the healthcare industry, especially over the past 20 to 30 years, which was catalyzed after the decoding of the human genome in 2003, as it identified over 8,000 genetic diseases. This breakthrough provided a roadmap for researchers and scientists, leading to accelerated innovation in areas such as DNA and RNA editing and the development of treatments for orphan and rare diseases.

Sears noted that small and emerging biotechnology companies have been at the forefront of this innovation. In 2023, approximately two-thirds of all clinical trials were initiated by small and emerging biotechnology firms, and about 56% of new drug substances approved by regulatory bodies originated from these smaller companies.

Sears pointed out that the sector has been underperforming over the past couple of years. This underperformance is largely due to the inverse correlation between healthcare stocks and interest rates and yields. However, she noted that the sector is now starting to see a favorable shift. Clinical advancements have continued unabated, and the pipeline of new treatments and drugs remains robust. Large pharmaceutical companies are facing a patent cliff, estimated to be around $30 billion by the end of this decade as their drugs become generic. Small and emerging biotechnology companies are seen as key sources for filling this pipeline. This situation is creating a potential M&A tailwind, as larger companies look to acquire innovative smaller firms to bolster their drug pipelines.

The biotechnology sector presents a unique investment opportunity, driven by favorable interest rates, ongoing clinical advancements, and increased M&A activity. Small and emerging biotech firms, in particular, are poised to play a critical role in addressing unmet medical needs and fueling innovation in the healthcare space. With that in context, let’s take a look at the 12 best biotech penny stocks to invest in now.

Our Methodology

To compile our list of the 12 best biotech penny stocks to invest in now, we used Finviz and Yahoo stock screeners to find the 30 largest biotechnology companies trading below the price of $5 as of December 26. We then used Insider Monkey’s Hedge Fund database to rank 12 stocks according to the largest number of hedge fund holders, as of Q3 2024. The list is sorted in ascending order of hedge fund sentiment.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

12 Best Biotech Penny Stocks To Invest In Now

12. OmniAb, Inc. (NASDAQ:OABI)

Number of Hedge Fund Investors: 19

Stock Price as of December 26: $3.53

OmniAb, Inc. (NASDAQ:OABI) is a biotechnology company that provides a platform for pharmaceutical companies and research institutions to discover new therapeutics by using antibody discovery technologies. The company’s innovative technologies are designed to accelerate the discovery of novel antibodies and enable pharmaceutical companies to advance their drug development pipelines efficiently and effectively.

OmniAb, Inc.’s (NASDAQ:OABI) proprietary discovery technology platform includes a diverse array of transgenic animals such as the OmniRat, OmniMouse, and OmniChicken. These animals are engineered to produce high-affinity, fully human antibodies, which are crucial for developing effective therapeutics. The company is continuously expanding its technology, with the recent launch of OmnidAb, a heavy-chain OmniChicken technology. This new addition to the platform is designed to support innovations to become more efficient by allowing faster and more cost-effective development of new transgenic animals and technology elements.

OmniAb, Inc. (NASDAQ:OABI) is enhancing its platform to meet the evolving needs of the industry. The company has recently launched a new platform called OmniHub, that integrates machine learning and AI tools with deep bioinformatics capabilities to enhance antibody discovery workflows. The company has expanded its partnerships, signing new agreements with institutions such as 92Bio, Memorial Sloan Kettering Cancer Center, and the Queen Mary University of London.

Looking ahead, OmniAb, Inc. (NASDAQ:OABI) plans to launch other novel technologies and partner experience enhancements. Additionally, the company is focusing on enhancing the partner experience, which includes improving the accessibility and usability of its technology platform. By making its technology more user-friendly and accessible, OmniAb, Inc. (NASDAQ:OABI) aims to attract a broader range of partners and increase the adoption of its platform.

11. Ardelyx, Inc. (NASDAQ:ARDX)

Number of Hedge Fund Investors: 20

Stock Price as of December 26: $4.64

Ardelyx, Inc. (NASDAQ:ARDX) is a biopharmaceutical company dedicated to developing therapies for kidney and gastrointestinal diseases. The company’s lead product, IBSRELA, is approved for the treatment of irritable bowel syndrome with constipation (IBS-C), while another key candidate, XPHOZAH, addresses hyperphosphatemia in chronic kidney disease patients.

Ardelyx, Inc. (NASDAQ:ARDX) is actively expanding its commercial reach to drive market penetration and increase patient access to its therapies. The company recently completed the expansion of its field sales team for IBSRELA, which is expected to significantly enhance its ability to reach and educate healthcare providers about the benefits of IBSRELA. This expanded sales force will also help healthcare providers expand their understanding of appropriate IBSRELA patient profiles. Moreover, the company is leveraging key industry conferences to highlight the impact of IBS-C on patients’ lives and the unique benefits of IBSRELA.

Ardelyx, Inc. (NASDAQ:ARDX) is committed to expanding its pipeline and exploring strategic partnerships to further enhance its product portfolio. The company is dedicated to developing and in-licensing or acquiring new products that align with its mission to serve patients with gastrointestinal and kidney diseases.